Moody's downgrades Telekom Slovenije - on review for further downgrade

Published on: 7th Aug 2012

Note -- this news article is more than a year old.

Moody's has downgraded Telekom Slovenije'sĀ long term issuer rating and senior unsecured rating to Baa3 from Baa2. Concurrently, Moody's has placed the ratings on review for further downgrade.

The action follows Moody's downgrade of the Republic of Slovenia's government
bond ratings to Baa2 from A2 on 2 August 2012. The outlook on the sovereign
rating is negative.

With the downgrade of Telekom Slovenije's rating to Baa3 from Baa2, Moody's
has removed the one-notch uplift for government support that the company's
rating previously benefited from. This reflects the rating agency's view that
the Government of Slovenia's ability to support Telekom Slovenije if required
has reduced, especially considering that the potential need for support from
various stakeholders may be increasing, in light of challenges faced by the
domestic banking sector.

Telekom Slovenije's Baa3 rating reflects the company's position as a leading
integrated telecom provider in the Slovenian market as well as its growing
presence in the SEE region, particularly in Kosovo and Macedonia. The rating
also reflects the company's weak operating performance as a consequence of
enhanced competitive and regulatory pressures and an adverse macro-economic
backdrop, which are affecting its growth prospects and operating margins.

Through the company's recent efforts to cut capital expenditures and
dividends, Telekom Slovenije has more recently managed to enhance its free cash
flow generation capacity and reduce debt, regaining some of its financial
flexibility and improving credit metrics. Going forward, this could be more
challenging in light of the more adverse macro economic background.

Telekom Slovenije is a government-related issuer (GRI), and Moody's overlays
the company's underlying credit strength (Baa3 equivalent) with its joint
default analysis for GRIs. The final rating of Baa3 currently reflects the
'high' default dependence between Telekom Slovenije and the Slovenian government
and Moody's expectation of moderate extraordinary government support being made
available if required, on account of Republic of Slovenia's 74.15% ownership of
the company.

Review for further downgrade

Moody's has placed Telekom Slovenije's ratings on review for further
downgrade primarily to assess the impact on its credit standing and liquidity
profile of (i) the deterioration in the sovereign's credit profile, and the
associated more challenging macro economic environment and domestic operating
conditions; as well as (ii) a deteriorating domestic banking sector.

Telekom Slovenije's liquidity profile has historically been relatively weak
for an investment-grade credit in light of the absence of long-term committed
bank-facilities. Telekom Slovenije's external liquidity sources are composed of
a number of short-term bilateral facilities from domestic banks, and their
appetite to renew these lines upon maturity may be reduced in light of their
weakening credit quality. This means that availability of funding for the
company may become less certain and more expensive than in the past.
Nevertheless, Moody's notes that the company does not have significant debt
maturities until December 2016, when its EUR300 million bond has to be repaid.

The review will also assess the extent to which Telekom Slovenije might be
affected by the risk of contagion from a weak macroeconomic environment in
Slovenia, which could exert further pressure on the company's revenues and cash
flow generation capacity. Moody's notes that around 85% of Telekom Slovenije's
consolidated revenues are generated in Slovenia, so the company is highly
dependent on the macroeconomic conditions in the country. In addition, Moody's
will revisit its GRI dependence and support assumptions as part of the review
process.